In Korea, carriers engage in fierce competition in one of the most technologically advanced markets with the highest smartphone penetration worldwide.

These conditions are forcing telecom operators to resort to smarter options to sell. For telecom operators, this is a matter of survival in a highly competitive market.

But some of these options — sales of new hardware and subsidies, in particular — may not always be within the legal framework of the government and can result in undesirable consequences.

This is exactly what has happened in Korea, where carriers are fighting to stay in business and capture each other’s market share.

Competition and Market Saturation

Korea is a saturated market for mobile phones; everyone owns a phone here.

With no scope of growth, operators are looking for ways to capture market share from competition. The major telecom operators in Korea – SK Telecom, KT, and LG U+ are providing huge subsidies to consumers.

These subsidies are tied to a mandatory subscription to the mobile operator for a minimum period of time. Consumers are offered as much as 70 percent price cut if they choose to opt into these telecom networks.

Lack of growth opportunities and highly volatile markets have led to this price war among telecom operators.

Operators are openly flouting regulations with no heed to legal compliance. When one telecom operator starts subsidizing, the remaining players are left with no other option but to match these prices. Or else, these companies face losing market share.

Thus, the industry as whole is selling at lower prices. At the end, operators recover the cost of subsidies through incentives from the handset manufacturer and the consumer, who is now locked into the network for at least two years.

Subsidies in Mobile Handsets

Subsidizing mobile phone is a common practice followed in the United States and some other countries. Around the world, consumers can buy the device at a very low price in exchange for an exclusive subscription with the telecom operator. Korean companies are trying to implement a similar business model, even against the existing regulations in the country that limits subsidies to 270,000 won (around $260).

Telecom operators have been resorting to subsidies to lure consumers for many years. Korea Communication Commission (KCC), the county’s telecom regulator, has imposed multiple penalties and fines on the mobile operators. Last July 2013, KCC handed down a fine of 66.9 billion won (around $640,000) and a seven-day business suspension to KT Corp. In December 2013, all three mobile operators were fined a combined amount of 106.4 billion won. ‘

But these companies seem to continue flouting the regulations. All three operators are now facing business suspension for 45 days between March 2014 and May 2014, as well as more fines.

Policies and Regulation

KCC wants to curb this practice used to poach consumers from competition. KCC says this practice does not benefit the consumer as it only decreases the price of the handset.

Instead, KCC wants to decrease the prices of the mobile usage plans, which is beneficial for the consumer in the long run.

KCC is currently looking at implementing new policies that will bring some sanity to the market. Penalties and suspensions are still a temporary solution, and a long-term solution should benefit the telecom operators and the consumers.